Intangible assets are non-material and cannot be physically handled. Examples of intangible assets are goodwill, brand recognition, customer lists, and trademarks. Whereas tangible assets (such as real property, vehicles and equipment) are quantifiable and generate revenue, intangible assets do not, which makes it difficult to assess and value them.
While tangible assets are distinguishable from intangible assets, it is often the case that both will be included in a transaction between parties, for example, one involving the purchase of another company.
Intangible assets may not be reflected in a company’s balance sheets, but they are considered a premium which a buyer may be willing to pay for as part of an acquisition. That is because intangible assets can contribute greatly to a company’s market success and help increase overall profitability.
Brand recognition is the degree and ease to which the public can identify a company or product just by viewing its logo. This can be of considerable value for someone who wants to purchase another company with great brand recognition.
Major companies like M&M, Ben & Jerry’s or Coca-Cola have great brand recognition because consumers readily know what products or services they can get from these companies.
Like brand recognition, goodwill can add significantly to the success of the company and increase its financial value. Goodwill is a combination of intangible assets like good employee relations or good customer relations.
For example, Company A has been the number one fried chicken fast food chain restaurant for more than twenty-five years. Recently, there was an issue with the chicken supplier which resulted in several patrons getting sick after eating at these restaurants.
A lesser company without a strong and loyal customer base might have found itself out of business because of this. However, Company A’s goodwill, developed over twenty-five years, allowed Company A to keep its restaurants open and maintain its customer base.
A trademark is a word, design or phrase that lets consumers identify the provider of one product versus another. Examples of trademarks are the golden arches for McDonalds and the bullseye for Target. When a franchisee purchases a McDonalds, they know those golden arches are so recognizable that they are getting a business that practically runs itself.
Trade secrets and other proprietary information may be considered intangible assets. For example, a secret recipe or soda formula that helps to make a product’s signature taste may all be considered intangible assets. As well, sales and employment contracts can also be considered intangible assets.
Let’s imagine you want to purchase a business that has lucrative employment contracts with some of the world’s top engineering scientists who are responsible for designing a software product that has really made the company a leader in the industry. You include the employment contracts as part of the sales agreement, which means the scientists who will continue to work for the company.
Valuing intangible assets is not a hard science and can be overvalued if left entirely to a company’s owner or undervalued by a prospective buyer. When valuing an intangible asset, you ultimately are asking what is a buyer willing to pay for it and how does it add to the economic value of the company.
Thankfully, there are experts who specialize in translating the value of intangible assets into cash. When looking for the right assessor, it is important to do your own research, get quotes and speak to references.
When valuing the intangible asset, the expert will do their own research. From their research, the expert will determine the best valuation approach to utilize. These methods can include a market or cost base approach or can forecast the economic benefits to the company.
In establishing a value for the intangible asset, the expert will look at the specific type of intangible asset. They will also look at the income generated by the business, forecast future revenues, and examine market risks.
This will entail looking at the overall earnings of the company, growth prospects, market conditions, and comparable sales. They will look at what it cost to develop the asset historically and what it will take to develop it now. The valuator will set the entire value for the company and distill the intangible assets that remain.
Valuing intangible assets can be incredibly difficult without the help of experts. An expert well-versed in your specific type of asset is a great place to start. While intangible assets often add value to an overall sale, they can also increase the price and be the source of business dispute. A business attorney can help you negotiate these matters to ensure that your sale or purchase of a business accurately reflects what you desire.